Turkey: Draft Amendments Might Hinder Un-Licensed Power Generation

Last Updated: 21 December 2015
Article by Şahin Ardiyok and Tolga Turan

"Efficiency is the goal; competition is the means; open access,
restructuring and deregulation are terms sometimes
used to describe the reforms, but they are the tools to achieve it."
Sally Hunt, 20021

1. Introduction

The Energy Market Regulatory Authority (EMRA) announced a draft amendment to the Regulation on Unlicensed Power Generation (LUY) that imposes considerable restrictions on the current application of LUY. These restrictions can be classified into three:

  1. Restrictions on side-by-side applications
  2. Restrictions on the share transfers before commissioning
  3. Restrictions on distribution companies in carrying out this business.

In this paper, we will evaluate the relevance of each restriction and analyze their potential impact on the existing and ongoing projects.

2. Recollection

According to Article 14 of the Electricity Market Law, renewable power plants with a capacity up to 1 MW are exempt from license requirement, and the Council of Ministers has the authority to scale it up to 5 MW. These power plants are also eligible for feed-in tariffs identified in the Law No: 5346 for 10 years after commissioning.2 Extra feed-in tariffs are also applicable if domestically manufactured equipment is used in the plant.

The goal in this exemption is to encourage self-generation for the purposes of self-consumption, hoping that as the volume of this type of generation increases the burden on the distribution and transmission lines will ultimately be reduced. That is, self-consumption in essential in this regard. This is explicitly emphasized in Article 17/1 of LUY:

"The principle in un-licensed power generation is to meet the self-consumption needs."3

However, this principle has so far not seen as an obstacle by both market participants and the Regulator itself against plants without self-consumption. As a consequence, plants with no self-consumption have been allowed to build un-licensed power plants, and the entire volume generated has become eligible for feed-in tariffs. This has triggered discussions among the energy circles, and many people argued that in cases where commercial considerations override self-consumption needs, un-licensed power generation should not be an option and obtaining a license from EMRA should be a strict requirement. EMRA, however, adopted the opposite approach and allowed such installments.

Furthermore, although the capacity limit has been set at 1 MW, side-by-side settlements have been allowed and 5 to 10 MW projects have been put in place by the same undertakings. This has also triggered discussions among the energy circles, and such applications have been disputed within the sector and it is even argued by some stakeholders that side-by-side installments are beyond the goal of the legislation. Given the economies of scale dictated by the economics of solar power, however, it is also argued that such installments are more than necessary if the renewable targets of the country are to be met.

Last but not least, many people claimed that the available connection capacity for un-licensed power generation is being booked by the companies affiliated with the distribution companies in their respective regions. Since the allocations are being made by the distribution companies themselves, it is claimed that the independent project developers have been disfavored against the developers associated with the distribution companies.

These controversial applications encouraged a great number of investors to take advantage of this favorable tide, and people started to buy and sell projects before commissioning and even construction.

The controversy and opposition against these applications have also been intensified because of the procedural difficulties in obtaining wind and solar licenses from EMRA and costs associated with these procedures.

3. The Proposal

The proposed amendments can be seen as an attempt to address these controversies and alleged misuse of license exemption.

First, side-by-side applications to achieve more than 1 MW capacity carried out by a single undertaking are being outlawed. It is stated in the draft that only 1 MW capacity can be allocated from a transformer center to a single real or legal person or entities affiliated with them. That is, no company or its affiliates can be granted more than 1 MW capacity even if the projects are technically separate and legal personalities are legally unbundled. There is no explicit provision in the draft addressing the status of the existing projects or projects that have already secured call letters from the distribution companies. One can predict that the existing projects will not be vulnerable since the "forward applicability" is a settled rule in Turkish public law. However, the status of the ongoing projects is vague at this stage.

Second, in order to prevent the exchange of the projects and distinguish between the real investor and the manipulator, transfer of the shares of the project company is being restricted, and it is no longer allowed between the application and commissioning. After commissioning, shares can be transferred meeting certain conditions. One can justifiably argue that there are projects at the moment for which negotiations and/or due diligence processes are underway, and certain costs have already been incurred for these potential exchanges. Similarly, the status of these projects in terms of shares transfer is vague.

Third, distribution and the assigned supplier companies are being completely driven out by the un-licensed power generation business. In this regard,

  1. Direct or indirect shareholders of the distribution and the assigned supplier companies
  2. Persons working for the distribution and the assigned supplier companies or for the direct or indirect shareholders of distribution and the assigned supplier companies
  3. Legal persons who are direct or indirect shareholders of the persons under the scope of (a) and (b)

are not allowed to carry out un-licensed power generation. Again there is no explicit provision enlightening the status of the ongoing projects.

There is no provision related to the requirement of self-consumption in the proposed draft; therefore, one can still assume that projects without generating electricity essentially for self-consumption purposes are still within the scope of legal boundaries. However, one should also keep in mind that Article 17/1 of LUY is still enforceable.

4. Why Now?

Why have such restrictions become one of the hottest topics in Turkey during the last quarter of 2015? It is likely because the spread between the feed-in tariffs and the spot day-ahead prices widened in the course of 2015. The below graph depicts the spot prices and the feed-in tariff level for wind/hydro and solar comparatively.

As seen from the graph, in 2015 the average spot prices (PTF) revolved around US$51 whereas the feed-in tariffs has a constant value at US$73 for hydro and wind and US$133 for solar. The spread represents the extra revenue generated from participating within the YEKDEM portfolio. For 2016 the final YEKDEM portfolio has been announced by EMRA in 08.12.2015, and the total volume has reached 15.000 MW. Concerns on the burden that such a volume would ultimately lead turn out to be among the hottest topics in Turkish power market. The below analysis attempts to show the potential financial effects of the YEKDEM portfolio on the Turkish electricity market, based on certain assumptions.4 The extra cost will be incurred by the final customers since these costs will ultimately be passed to the final consumer prices.

These concerns on the cost of the YEKDEM portfolio also revitalized the controversies regarding the application of LUY. As of December 2015, the number of projects and their capacity is depicted in the below chart:

5. Conclusion

In summary, the expected cost of the feed-in tariff system overall triggered the discussions regarding un-licensed power generation and the formerly debated topics seem to have reemerged. There are still two points to be handled:

  1. Grandfathering the existing projects and drawing a line (call letter or construction) for securing the existing projects: This might happen during the final discussions at EMRA Board and a provisional article may be added to the draft for grandfathering purposes. This might also reduce the volume of the legal cases brought against the amendments.
  2. The draft was announced before the political crisis between Russia and Turkey, which considerably highlighted the security of supply concerns in Turkish natural gas and power sectors.5 Policymakers might reevaluate the proposed restrictions on both licensed and unlicensed power generation eligible for feed-in tariffs. The draft was also announced before the Paris Agreement through which Turkey accepted the Nationally Determined Contribution and promised to increase the capacity of solar and wind to 10 GW and 16 GW respectively until 2030.

The project owners specifically and the stakeholders as a whole are waiting to see the final version of the amendments. It might be approved by the EMRA Board as it is, or revised, or shelved entirely. We will wait and see.

Footnotes

[1] Sally Hunt, "Making Competition Work in Electricity," Wiley, 2002.

[2] Law on Utilization of Renewable Energy Resources for the Purpose of Generating Electrical Energy

[3] "Lisanssız üretim yapan gerçek ve tüzel kişilerin kendi ihtiyaçlarını karşılamak için üretim yapmaları esastır."

[4] The average generation volumes are nameplate volumes written on the generation license. These volumes might realize lower due to several conditions such as weather. PTF prices are assumed to stay constant in USD terms during the course of 2016. It is a reasonable assumption since PTF prices might go up in TRY terms but exchange rates might as well go up (Please note the FED interest rate decision taken in 16 December 2015). It is also assumed that no extra costs such as extra taxes or fees will be imposed on YEKDEM portfolio participants by introducing new regulations.

[5] Please note that around 50 percent of total generation in Turkey is natural gas based. Thus, natural gas markets and electricity markets are inexorably intertwined.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Şahin Ardiyok
Tolga Turan
 
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